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Why Did Apple Buy Back $14B of Its Own Stock?

Written by: Chris Ciaccia02/07/14 - 1:43 PM EST

Tickers in this article:
AAPL

Updated from 8:31 a.m. EST to include comments from JPMorgan analyst in the fifteenth paragraph.

NEW YORK (TheStreet) -- Buying back one's own stock is seen as a sign of confidence, a sign that you believe the stock is undervalued. Apple's buyback of $14 billion of its own stock in the past two weeks is more than just a sign of confidence.

In an interview with The Wall Street Journal, Apple CEO Timothy D. Cook said Apple repurchased $14 billion of stock in the past two weeks, noting the company wanted to be "aggressive" and "opportunistic" with the repurchases. Cook said he was surprised by the sharp drop in shares following the company's fiscal first-quarter earnings report. The company beat Wall Street expectations on both the top and bottom line, and sold a record 51 million iPhones in the quarter.

Apple shares were higher in trading on Friday following news of the aggressive repurchases, rising 1.8% to $521.52.

Despite the results, it's quite unusual for a company to spend nearly a third of its domestic cash (Apple had just more than $34 billion in domestic cash at the end of the quarter) on share buybacks, in such a short period of time. I understand being confident, but this is boastful, and perhaps speaks to the fact that Cook is confident about the company's product pipeline. This is almost Jobsian-like boastfulness, except Cook is doing it with cash, whereas former CEO Steve Jobs did it with products.

BTIG analyst Walt Piecyk raised his price target to $552 following the disclosure and raised his fiscal 2014 and fiscal 2015 earnings estimates as a result. He now expects Apple to earn $41.56 and $46 a share in 2014 and 2015, respectively.

Apple has come under pressure from activist investor Carl Icahn, who has asked Apple to substantially increase its buyback program, calling the stock a "no-brainer" on television several times. Icahn owns roughly $3.6 billion worth of Apple stock, and has tweeted that he believes Apple should increase its buyback.

This isn't the first time Apple has come under pressure to do something with its mountain of cash, with Greenlight Capital hedge fund manager David Einhorn being the first in early 2013.

Cupertino, Calif.-based Apple is currently returning $100 billion to shareholders in the form of buybacks and dividends, and the recent purchases are part of that program.

It's quite likely that Apple will update its buyback and dividend program later this year, with Cook mentioning that Apple intends to update the program in either March or April. It's possible that Apple again taps the debt market, such as it did last year when it sold a then record $17 billion worth of debt with various maturities.